The Contagion Spreads to Strip Malls

Is the end of the housing boom having ripple effects in the commercial real-estate sector? In some weaker markets, the answer seems to be yes:

An article in today’s Journal says vacancies at U.S. strip malls have reached 7.4%, a 5 1/2-year high. Areas with the weakest housing markets are being hit hard as consumers curtail spending.

“In Roseville, Calif., outside Sacramento, strip malls are particularly struggling in areas where many new homes were built in the last few years, says Bob Nolasco, a senior vice president with Grubb & Ellis, a Chicago-based commercial real-estate firm. ‘It’s a combination of a glut of unanchored centers that have drawn in lower-credit tenants, [as well as] the housing market,’ he says, noting that housing construction there is about half what it was at its peak.”

Several deals for office properties in Long Island have unraveled as lenders toughen terms, Newsday reports. “Deals in contract are bogging down, with buyers invoking clauses in the fine print to opt out, or demanding and sometimes getting a price cut. Other properties are simply being pulled off the market,” the paper reports. “The contagion which started in the subprime market has spread,” says a person quoted in the story.

Commercial real-estate market in the Phoenix area has been extremely strong, but is expected to cool, The Arizona Republic reports. “It has begun to experience fallout from the subprime crisis as mortgage brokerages, title companies and financial-services firms downsize or close up shop,” says an economist quoted in the story. The industrial sector is expected to take a hit as well, since the suppliers of home builders will need less space as the housing slowdown continues.

The subprime mortgage collapse is having a ripple effect in the Kansas City Area, the Kansas City Business Journal says, reaching beyond residential real estate to commercial real estate. “Many of the people who invested in the subprime mortgage market also financed the lower tiers of commercial mortgage pools,” said a person quoted in the article. “As they started to see losses in their residential holdings, they became more conservative in their commercial investments, as well.”

Readers are you seeing more vacancies at your local strip mall? Is a commercial downturn the inevitable result of the subprime meltdown? –Lydia Serota